Stock exchanges in sub-Saharan Africa: capturing intent towards ESG requirements
Stock exchanges in sub-Saharan Africa: capturing intent towards ESG requirements
2 A number of leading stock exchanges are helping to drive sustainability reporting via the inclusion of environmental, social and governance (ESG) reporting requirements in their listing regulations. Following a review of listing regulations, corporate disclosure practices of listed companies and consultations with experts from stock exchanges and listed companies, this report explores the level and extent of sustainability activities of 10 stock exchanges across sub-Saharan Africa.
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STOCK EXCHANGES IN SUB-SAHARAN AFRICA: CAPTURING INTENT TOWARDS ESG REQUIREMENTS 3 Acronyms 4 Foreword 5 Executive summary 6 1. Introduction 8 2. Sub-Saharan Africa context 10 3. The influence of stock exchanges in driving ESG disclosure 13 4. Sub-Saharan African stock exchanges: current and future initiatives 16 5. The potential role of stock exchange and regulator associations 20 6. Sustainability reporting in sub-Saharan Africa 24 7. Conclusions and recommendations 29 References 31 Appendix: Companies included in disclosure survey 33 Acknowledgements 35 Contents
4 ACCA Association of Chartered Certified Accountants ASEA African Securities Exchanges Association BEE Black Economic Empowerment BIST Borsa Istanbul BM&F BOVESPA Bolsa de Valores, Mercadorias & Futuros de São Paulo BSE Bombay Stock Exchange BSE Botswana Stock Exchange CEO Chief executive officer CFO Chief financial officer CMA Capital Markets Authority CoSSE Committee of SADC Stock Exchanges CSR Corporate social responsibility DAX Deutscher Aktien Index EASEA East African Securities Exchanges Association EGX Egyptian Exchange ESG Environmental, social and governance FSB Financial Services Board FSC Financial Services Commission FTSE Financial Times and the London Stock Exchange GDP Gross domestic product GRI Global Reporting Initiative GSE Ghana Stock Exchange HDI Human Development Index IFC International Financial Corporation IIRC International Integrated Reporting Council IIX Impact Investment Exchange IOSCO International Organization of Securities Commissions IR Integrated reporting JSE Johannesburg Stock Exchange KPI Key performance indicator LSE Lusaka Stock Exchange LSE London Stock Exchange MSE Malawi Stock Exchange NASDAQ National Association of Securities Dealers Automated Quotation system NBFIRA The Non-Bank Financial Institutions Regulatory Authority NSE Nigerian Stock Exchange NSE Nairobi Securities Exchange NYSE New York Stock Exchange OECD Organisation for Economic Co-operation and Development RBM Reserve Bank of Malawi SA South Africa SADC Southern African Development Community S&P Standard & Poor’s SEC Securities and Exchange Commission SeC Securities Commission of Zimbabwe SEM Stock Exchange of Mauritius SRI Socially responsible investment SSE Sustainable Stock Exchanges Initiative UN United Nations UNCTAD United Nations Conference on Trade and Development UNEP United Nations Environment Programme UNEP FI United Nations Environment Programme Finance Initiative UNGC United Nations Global Compact UNPRI United Nations-supported Principles for Responsible Investment Initiative USE Uganda Stock Exchange WACMIC West African Capital Markets Integration Council WBCSD World Business Council for Sustainable Development WEF World Economic Forum WFE World Federation of Exchanges WSE Warsaw Stock Exchange ZSE Zimbabwe Stock Exchange Acronyms
STOCK EXCHANGES IN SUB-SAHARAN AFRICA: CAPTURING INTENT TOWARDS ESG REQUIREMENTS 5 Foreword Through its research programme, engagement with key non-financial reporting standards setters and policy and advocacy activities, ACCA has for over two decades encouraged and supported the introduction of sustainability reporting regulations around the world. Stock exchanges have a high degree of influence over the companies listed in their jurisdiction and are therefore well placed to implement regulations requiring listed companies to report on their environmental, social and governance policies and impacts.
Such an approach is adopted by a number of stock exchanges around the world, including the Johannesburg Stock Exchange, which introduced sustainability reporting in 2002 on a comply-or-explain basis and has pioneered integrated reporting since 2010. As many countries in sub-Saharan Africa lack sophisticated legal and regulatory systems, stock exchanges have an even greater degree of influence over listed companies than is the case in more developed countries. Beyond the JSE, little is heard about how exchanges in sub-Saharan Africa are considering sustainability and how this flows down to the reporting practices of listed companies in the region.
To redress the balance, ACCA has undertaken research into the listing requirements of 10 exchanges across sub-Saharan Africa and the reporting practices of the largest companies listed on each exchange. By doing so, ACCA aims to highlight examples of good practice among both exchanges and listed companies across sub-Saharan Africa, as well as to influence exchanges in the region and further afield to give proper consideration to sustainability.
We aimed to discover any intentions of 10 sub-Saharan Africa exchanges to introduce sustainability reporting initiatives or listing requirements. By doing so, we hope that, however modest the intentions of these exchanges, they will drive better and greater corporate transparency of companies listed on them. Their actions will also serve as examples for others to follow, to begin pushing for greater levels of accountability. We hope you enjoy reading the resulting report. Jamil Ampomah Director, ACCA Sub-Saharan Africa
6 Stock exchanges, via their listing regulations, have the ability to influence the types of disclosure made by listed companies.
By incorporating environmental, social and governance (ESG) disclosure requirements into such listing rules, stock exchanges can create a powerful incentive for companies to measure and publicly disclose sustainability data. A number of leading stock exchanges have realised this potential and have been highly active in driving sustainability reporting by listed companies in their jurisdictions. Beyond the Johannesburg Stock Exchange (JSE), exchanges in sub-Saharan Africa are rarely associated with sustainability. To address this, ACCA has undertaken research into what exchanges are doing to further sustainability reporting in the region.
By reviewing listing requirements (including any voluntary guidelines) and consulting with senior stock exchange representatives, it has been possible to analyse both current and prospective ESG initiatives from exchanges. The JSE is the most advanced exchange in the region (and arguably a world leader) in promoting sustainability. The exchange introduced ESG reporting on a comply-or-explain basis in 2002 and since 2010 has similarly required companies to produce integrated reports.
Beyond the JSE, no other exchanges have implemented any form of sustainability reporting requirement or voluntary reporting guidelines, but the research did identify four other exchanges that were taking steps in this direction:
the Ghana Stock Exchange (GSE) has initiated plans to develop a sustainability reporting framework for listed companies
the Stock Exchange of Mauritius is intending to launch a sustainability index
the Nigerian Stock Exchange has signed up to the Sustainable Stock Exchanges Initiative (SSE)
the Zimbabwean Stock Exchange (ZSE) has drafted changes to its listing regulations that would require companies to report on their environment and social impacts.
The public disclosures of the top listed companies on the exchanges included in the study were reviewed to determine the level of compliance with any sustainability reporting requirements, and in the absence of such requirements to determine whether sustainability reporting was being driven by companies rather than by exchanges. The company disclosure review confirmed that levels of sustainability reporting by listed companies were high in South Africa but very low elsewhere in the region. This reflects the fact that the JSE is the only exchange with any form of ESG reporting requirement and demonstrates the level of influence that exchanges can have on listed companies.
There were examples of good practice from countries outside South Africa, but these were very much the exception rather than the norm.
STOCK EXCHANGES IN SUB-SAHARAN AFRICA: CAPTURING INTENT TOWARDS ESG REQUIREMENTS 7 Stock exchanges should:
consider introducing mandatory ESG reporting requirements within listing regulations
produce voluntary ESG reporting guidelines for listed companies, if a mandatory approach is not seen as appropriate
consult with others that already have ESG reporting requirements, to gain an understanding of how to implement such initiatives and build capacity
engage with international sustainability initiatives such as the Sustainable Stock Exchanges Initiative (SSE), the UN Environmental Programme Finance Initiative (UNEP FI) or the Global Reporting Initiative (GRI) when developing any mandatory ESG reporting requirements or voluntary reporting guidelines
consult with participants in the broader investment supply chain, such as asset managers and asset owners who are actively seeking greater levels of ESG disclosure from companies.
International and regional associations of exchanges and regulators should:
look to influence their members in sub-Saharan Africa to incorporate sustainability into their activities. WFE’s recently launched sustainability working group has a significant opportunity to influence exchanges in subSaharan Africa. Listed companies should:
coordinate with stock exchanges on developing mandatory ESG reporting requirements or voluntary reporting guidelines that achieve the objective of increasing levels of transparency on sustainability while being ‘user friendly’
move beyond charitable and philanthropic activities to integrate sustainability into corporate strategies so that environmental and social impacts are assessed and managed
create links with international sustainability initiatives such as the GRI, UN Global Compact (UNGC) or World Business Council for Sustainable Development (WBCSD), when looking to develop sustainability reporting
take the lead and start reporting on sustainability, in the absence of stock exchange-led sustainability initiatives
consider the various benefits to themselves and their stakeholders that could follow from adopting a closer focus on sustainability issues.
Other influential actors should:
push stock exchanges in sub-Saharan Africa to consider sustainability more carefully, with a specific focus on exchanges that have already taken initial steps in this area
highlight examples of good reporting practices by companies in sub-Saharan Africa so that companies looking to report have a benchmark to aim for. RECOMMENDATIONS Through this analysis, ACCA was able to develop a series of recommendations for the key actors in this area, to help develop more extensive and meaningful disclosure requirements within the listing rules, and to increase the quality and quantity of sustainability disclosures from listed companies.
8 Over the past 20 years, companies have come under increasing pressure to measure and manage their impacts on the environment and society, and communicate this publicly. Where companies report on such matters, this usually takes the form of a sustainability report, distinct from a company’s annual report and accounts. In recognition of the importance of sustainable business behaviour, a number of leading stock exchanges encourage or require sustainability reporting, either through voluntary reporting guidelines or through mandatory reporting requirements. These include the Sao Paolo stock exchange (BM&F BOVESPA) in Brazil and the Johannesburg Stock Exchange (JSE) in South Africa.
Research ranking 45 of the world’s stock exchanges on the basis of the extent to which large listed companies are disclosing sustainability indicators has shown a clear link between stock exchange-led action on sustainability reporting and high levels of disclosure (CK Capital 2013).
Although there is clear intent to promote sustainability among some of the world’s stock exchanges, African exchanges beyond the JSE are rarely associated with sustainability and are rarely mentioned in any research papers on the topic. To fill this gap, ACCA has explored what stock exchanges are currently doing in sub-Saharan Africa to stimulate sustainability reporting and has examined their plans on this issue. The research also assesses the level of sustainability reporting by listed companies in the countries under review, presenting some examples of good practice. The research focuses on 10 exchanges in sub-Saharan Africa:
Botswana Stock Exchange
Ghana Stock Exchange
Johannesburg Stock Exchange
Lusaka Stock Exchange
Malawi Stock Exchange
Nairobi Securities Exchange
Nigerian Stock Exchange
Stock Exchange of Mauritius
Uganda Securities Exchange
Zimbabwe Stock Exchange.
METHODOLOGY This report is based on a review of the listing requirements issued by each exchange considered, an analysis of the disclosure of more than 90 listed companies across subSaharan Africa, and consultation with selected stakeholders. The research was conducted in late 2013 and early 2014. Listing requirements review The listing requirements of the 10 stock exchanges were reviewed to determine the extent to which companies were required to report on any ESG matters. Any voluntary guidelines relating to any broader non-mandatory sustainability initiatives were also included in the research.
Company disclosure analysis The public disclosures of the largest listed companies in each country were reviewed to determine the level and extent of corporate disclosure on sustainability. Documents reviewed included annual reports, sustainability reports and integrated reports. A review of other types of corporate communication, such as online resources, was also conducted where possible. Consultation with selected stakeholders Senior representatives from stock exchanges, regulators and listed companies were consulted to gather their observations and opinions on sustainability reporting and stock exchange activity in sub-Saharan Africa.
STOCK EXCHANGES IN SUB-SAHARAN AFRICA: CAPTURING INTENT TOWARDS ESG REQUIREMENTS 9 REPORT STRUCTURE The rest of the report is divided into the following sections. Chapter 2 provides background on sub-Saharan Africa, the 10 countries included within the study and the corporate sustainability initiatives that are currently operating in the region. Chapter 3 explores the role of stock exchanges in driving ESG disclosures. Chapter 4 presents the current and future sustainability reporting activities of the 10 exchanges reviewed. Chapter 5 reviews the sustainability reporting activities of the international and regional stock exchange and regulator associations that are active in sub-Saharan Africa, which could affect the 10 exchanges included within the study.
Chapter 6 presents the findings of a survey of 96 companies listed on the stock exchanges included within the study. Chapter 7 sets out the report’s conclusions and a series of recommendations for stock exchanges, listed companies and other influential actors such as stock exchange associations and international sustainability initiatives operating in subSaharan Africa.
10 Covering an area of just over 30 million km2 , around 20% of the Earth’s total land mass, and with a current population of just over one billion people, Africa is the second largest continent on the planet in both size and population. It has a total of 54 UN-recognised states. The continent is politically and culturally split into two regions: North Africa, which is more often affiliated with the Arab world, and sub-Saharan Africa. The Sahara desert marks this geographic and cultural boundary. Sub-Saharan Africa is made up of 49 countries, covering the majority of the land area of the continent.
The region is home to around 85% of Africa’s population.
Although fallout from the 2008 credit crunch has slowed economic progress in many countries around the world, economists tip Africa as a significant source of growth in the future. The World Bank believes that economies in the continent could be on the brink of an economic acceleration, similar to that of China 30 years ago and India 20 years ago (World Bank 2011). In 2013, sub-Saharan Africa’s economy grew by 4.7%, and seven African countries are expected to be among the top 10 fastest-growing economies in the world for the period 2011–15 (World Bank 2014, Tafirenyika 2012). Much of this growth is dependent on natural resources – including fossil fuels and metallic and non-metallic minerals.
These are non-renewable, and require careful management to ensure future growth and sustainability (UNCTAD 2012). This economic progress will take place during a period of significant demographic change. By 2025 sub-Saharan Africa’s population is expected to have grown to around 1.2bn, and to be over 2bn by 2050 (PRB 2011). These rising numbers, coupled with higher income levels, will generate a large African middle class. This will create an internal market for a wide range of products and services, including mobile phones, cars, food, clothes and financial services (Fletcher 2010). Politically, most countries in sub-Saharan Africa have democratically elected governments and the region has seen major advances in freedom and democracy, although this is not a consistent story across the region (Freedom House 2013).
Social unrest has generally related to economic concerns about the cost of living, and population growth will probably put pressure on governments to find equitable solutions to economic and social challenges. Corruption remains a major issue: a recent survey from Transparency International (2013) shows that many countries in sub-Saharan Africa have very weak institutions.
2. Sub-Saharan Africa context Figure 2.1: Sub-Saharan Africa North Africa Sub-Saharan Africa
STOCK EXCHANGES IN SUB-SAHARAN AFRICA: CAPTURING INTENT TOWARDS ESG REQUIREMENTS 11 KEY ECONOMIC AND SOCIAL INDICATORS In order to provide an idea of the range of countries covered by this study, Table 2.1 collates the key economic and social indicators. Included are population figures, gross domestic product1 (GDP) and GDP growth rates (UNSD 2014), the human development index2 (HDI) ranking (UNDP, 2013) and key economic sectors. All figures are for 2012. 1. GDP: the market value of all officially recognised final goods and services within a country in a year.
2. HDI: a comparative measurement of life expectancy, literacy, education, standards of living and quality of life for countries worldwide. The figures included above show each country’s HDI ranking – its position out of 187 countries. Botswana Ghana Kenya Malawi Mauritius Nigeria South Africa Uganda Zambia Zimbabwe Population (million) 2.1 25.2 44.0 16.8 1.3 174.5 48.6 34.8 14.2 13.2 GDP ($ billion) 14.4 40.7 75.0 5.7 11.5 262.6 384.3 21.7 21.5 9.8 GDP growth rate (%) 4.2 7.9 4.6 1.9 3.2 6.5 2.5 3.4 7.3 4.4 HDI ranking 119 135 145 170 80 153 121 161 163 172 Key economic sectors Mining, agriculture Agriculture, fossil fuels, mining, m’facturing, services Agriculture, tourism Agriculture Mixed economy Fossil fuels, telecomms Mixed economy Mining, agriculture Mining, agriculture Mining, agriculture Table 2.1: Economic and social statistics for 10 African countries in 2012
12 CORPORATE SUSTAINABILITY IN SUB-SAHARAN AFRICA A number of international initiatives have been instigated to promote corporate sustainability and to act as a platform on which companies can share best practice. A number of these, including those listed below, are active in sub-Saharan Africa. United Nations Global Compact (UNGC) The UNGC is a global strategic policy initiative for businesses that are committed to aligning their operations and strategies with 10 universally accepted principles in the areas of human rights, labour, environment and anti-corruption (UNGC 2014). The UNGC has local networks in sub-Saharan Africa, including: Cameroon, Cote d’Ivoire, Equatorial Guinea, Ghana, Kenya, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Nigeria, Senegal, South Africa, Sudan, Uganda, Zambia and Zimbabwe.
The World Business Council for Sustainable Development (WBCSD) The WBCSD is led by the CEOs of forward-thinking companies that stimulates the business community to create a sustainable future for business, society and the environment (WBCSD 2014). The WBCSD has a number of regional networks and informal alliances of businesses in specific regions with a shared commitment to providing sustainability leadership in their respective countries. Three associations exist in sub-Saharan Africa: in Zimbabwe, Mozambique and South Africa. The Global Reporting Initiative (GRI) The GRI promotes the use of sustainability reporting as a way for organisations to become more sustainable and contribute to sustainable development (GRI 2014).
The GRI has regional Focal Points: offices based around the world to create reporting communities in their respective regions. The Focal Point South Africa aims to promote GRI’s work in southern Africa and the continent more widely. United Nations Environment Programme Finance Initiative (UNEP FI) The UNEP FI is a global partnership between UNEP and the financial sector. Over 200 financial institutions work with UNEP to understand the impacts of environmental and social phenomena on financial performance (UNEP FI 2014). The UNEP FI Africa Task Force leads UNEP’s involvement in relevant activity in the region.
The Initiative has been involved in discussions about sustainable development and finance across the continent for over a decade, organising training, roundtables and knowledge-sharing platforms for representatives from the corporate and finance communities.
STOCK EXCHANGES IN SUB-SAHARAN AFRICA: CAPTURING INTENT TOWARDS ESG REQUIREMENTS 13 To date, the majority of stock exchanges have been little more than observers in the development of sustainability reporting. Their role is potentially significant. By incorporating environmental, social and governance (ESG) disclosure requirements into their listing rules, stock exchanges can create a powerful incentive for companies to measure and disclose sustainability performance data to the market. In light of this, there have been a growing number of initiatives around the world to incorporate sustainability reporting into stock exchange operations in recent years.
Generally, this has been achieved by two specific methods:
sustainability disclosure requirements
SUSTAINABILITY DISCLOSURE REQUIREMENTS Certain stock exchanges urge or require (though voluntary or mandatory means) companies to report on a range of different sustainability issues. Some examples of this practice are given below.
In the UK, from October 2013, it is mandatory for listed companies to disclose their greenhouse gas emissions (Defra 2013).
In the US, the NASDAQ recommends that listed companies report, on a voluntary basis, on various sustainability issues such as water use, gender equality and greenhouse gas emissions (EY 2012).
In South Africa, since 2010, the JSE has required listed companies to produce, on a comply-or-explain basis, integrated reports that include sustainability and governance information (Visser 2013).
The United Nations Conference on Trade and Development (UNCTAD) points out that both mandatory and voluntary approaches have their merits – while the former normally results in more disclosure overall, the latter can be more appropriate where the level and experience of reporters is low. Voluntary approaches allow companies time to develop their reporting functions to collate the necessary data to produce a sustainability report (UNCTAD 2013). Such stock exchange-led action is not limited to larger, more developed exchanges: sustainability reporting has also been included within the listing requirements of several stock exchanges in non-OECD countries (KPMG 2013a).
This is demonstrated well by the Sustainable Stock Exchanges Initiative (SSE). This initiative is co-convened by four corporate-focused UN programmes3 and aims to explore how exchanges can work together with investors, regulators and companies to enhance corporate transparency, and ultimately performance, on ESG issues and to encourage responsible long-term approaches to investment (SSE 2014). The SSE currently has 10 partner exchanges, including the two largest in sub-Saharan Africa. These are as follows:
The Brazilian Exchange (BM&F BOVESPA)
Borsa Istanbul (BIST)
The Bombay Stock Exchange (BSE)
The Egyptian Exchange (EGX)
The Johannesburg Stock Exchange (JSE)
The London Stock Exchange (LSE)
The Nigerian Stock Exchange (NSE)
The Warsaw Stock Exchange (WSE).
3. The Sustainable Stock Exchanges initiative (SSE) is co-convened by the UN-supported Principles for Responsible Investment, the United Nations Conference on Trade and Development, the United Nations Environment Programme Finance Initiative, and the UN Global Compact. 3. The influence of stock exchanges in driving ESG disclosure
14 SUSTAINABILITY INDICES Stock exchanges have developed distinct sustainability indices, which include companies on the basis of their ESG performance. These indices tend to fall into two main categories – broad-based indices and sector-specific indices. More recently, a third variation has been developed – thematic indices. The three types of index are therefore:
broad-based stock indices from all industry sectors that use extensive ESG criteria and scoring systems to select companies that are leaders in social and environmental responsibility
sector-specific indices that focus specifically on companies that provide solutions to sustainability challenges, particularly in relation to clean technology, sustainable energy and environmental services
thematic indices that focus on a single ESG issue, such as carbon emissions/climate change (WFE 2010).
Table 3.1 provides some examples of the different types of sustainability index. Table 3.1: Indices grouped by category Category Index Location Parameters Broad-based indices FTSE4Good series UK Policy, performance and reporting of listed companies measured against various indicators across ESG issues. BM&FBOVESPA Corporate Sustainability Index Brazil JSE Socially Responsible Investment Index South Africa S&P/EGX ESG Index Egypt Wiener Börse VÖNIX Sustainability Index Austria Sectorspecific indices FTSE Environmental Technology Index series UK The wider performance of companies whose core business is in the area of the exchange (eg clean energy) Deutsche Börse DAXglobal Alternative Energy Index Germany NASDAQ OMX Clean Edge Global Wind Energy Index US Thematic indices NYSE Euronext Low Carbon 100 Europe Index US The wider performance of companies within a region that perform best according to a specific ESG area (eg carbon emissions) FTSE Developed ex-Fossil Fuels Index Series UK
STOCK EXCHANGES IN SUB-SAHARAN AFRICA: CAPTURING INTENT TOWARDS ESG REQUIREMENTS 15 BENEFITS OF STOCK EXCHANGE-LED SUSTAINABILITY INITIATIVES The benefits of sustainability reporting for companies are well recognised. Stock exchanges can also benefit from greater levels of such disclosures, and can initiate this through the means noted above. They can also benefit in the following ways. Meeting the information needs of investors Investors are increasingly incorporating non-financial information into their investment decisions. By implementing sustainability disclosure requirements, an exchange can ensure that companies produce the necessary information to meet investor needs.
Demonstrating leadership Few exchanges have taken action on ESG disclosures. By doing so, exchanges can demonstrate leadership in this evolving field. Creating more transparent and efficient markets Greater transparency provides investors with better information on which to base their decisions. This will help to increase market efficiency and ultimately result in more stable capital markets. Improving exchange performance There is some evidence that companies that produce sustainability reports can outperform those that do not (Harvard Business School 2013). By requiring companies to report on sustainability, an exchange can increase its competitive advantage through improved performance.
A ROLE FOR STOCK EXCHANGES As pivotal players in capital markets, exchanges need to be cognisant of the potential long-term impact of unsustainable business practices on the operating environment and the health of the economy. Whether through performing a regulatory function or otherwise, exchanges certainly have a vested interest in ensuring the quality of the stocks they are taking on. The level of involvement of an exchange will depend on a range of factors, such as the existing legal framework, what is currently practised and the extent to which sustainability reporting is being taken up by corporates.
Ultimately, the approach should be up to each individual exchange. The reality is, however, that exchanges have significant influencing potential and are well positioned to exert that influence in a variety of ways, including collaborating with other players across the investment value chain in strengthening the call for greater transparency and advancing engagement on sustainability between companies and their shareholders.
Corli Le Roux, head of SRI Index and sustainability at Johannesburg Stock Exchange
16 Many stock exchanges across Africa are relatively new by international standards. For example, the majority of exchanges included in this study were founded in in the 1980s and ’90s. A notable exception to this is the Johannesburg Stock Exchange, which was founded in 1887. Figure 4.1 shows the African countries with stock exchanges, and Table 4.1 provides details of the 10 exchanges and their regulators that have been reviewed in this report. 4. Sub-Saharan African stock exchanges: current and future initiatives Table 4.1: Stock exchanges included within the study Country Exchange Year established Regulator Botswana Botswana Stock Exchange (BSE) 1989 Non-Bank Financial Regulatory Authority Ghana Ghana Stock Exchange (GSE) 1989 Securities and Exchange Commission (SEC) Ghana Kenya Nairobi Securities Exchange (NSE) 1954 Capital Markets Authority (CMA) Kenya Malawi Malawi Securities Exchange (MSE) 1994 Reserve Bank of Malawi (RBM) Mauritius Securities Exchange of Mauritius (SEM) 1989 Financial Services Commission (FSC) Mauritius Nigeria Nigerian Stock Exchange (NSE) 1960 Securities and Exchange Commission (SEC) Nigeria South Africa Johannesburg Stock Exchange (JSE) 1887 Financial Services Board (FSB) Uganda Uganda Securities Exchange (USE) 1997 Capital Markets Authority (CMA) Uganda Zambia Lusaka Stock Exchange (LSE) 1994 Securities and Exchange Commission (SEC) Zambia Zimbabwe Zimbabwe Stock Exchange (ZSE) 1993 Securities Commission (SeC) of Zimbabwe Figure 4.1: Map showing the locations of African stock exchanges Top five African stock exchanges by market capitalisation (above $10 billion) Other African stock exchanges Egypt Morocco Algeria Libya Sudan Tanzania Nambia Niger Cameroon Mali Zimbabwe Botswana Ghana Uganda Zambia Malawi Nigeria South Africa Kenya Mauritius Mozambique Source: IFC 2011
STOCK EXCHANGES IN SUB-SAHARAN AFRICA: CAPTURING INTENT TOWARDS ESG REQUIREMENTS 17 CURRENT SUSTAINABILITY REPORTING ACTIVITIES Of the 10 exchanges reviewed, five have implemented or taken steps towards incorporating ESG disclosures into their listing requirements. These are:
the Johannesburg Stock Exchange
the Ghana Stock Exchange
the Stock Exchange of Mauritius
the Nigerian Stock Exchange
the Zimbabwe Stock Exchange. The Johannesburg Stock Exchange JSE is a global leader in sustainability reporting. In 2013, the World Economic Forum (WEF) ranked South Africa first out of 148 countries for regulation of securities exchanges for the fourth consecutive year (All Africa 2013).
The JSE has been at the forefront of developing sustainability reporting for listed companies – from reporting on specific ESG indicators to integrated reporting – and launched a specific sustainability index, the JSE SRI, in 2004. The JSE’s sustainability reporting developments are shown in the timeline in Figure 4.2.
Because the JSE listing requirements now oblige companies to report on the extent to which they apply the principles of the King Code, or to explain any deviations, JSE-listed companies have had to pursue sustainability reporting since 2002 and integrated reporting since 2010, or to explain why they are not doing so. Research by ACCA has shown that following the requirement to produce an integrated report on a comply-or-explain basis, the quantity of ESG information within company reports has increased significantly (Solomon and Maroun 2012).
Figure 4.2: Sustainability reporting developments at the Johannesburg Stock Exchange 1994 King I King II BEE Act Companies Act UNPRI and SSE JSE IR requirement BEE Act Amendment JSE SRI launched JSE SRI Index assesses companies listed on the JSE Index according to ESG criteria The Black Economic Empowerment Act aims to increase employment among and promote racial groups previously discriminated against in the economy, by setting targets and objectives for companies Signatory to the United Nations Principles for Responsible Investment, and founding member of the Sustainable Stock Exchanges Initiative Requirement for all listed companies on the JSE to provide an integrated report, on a comply-or-explain basis, detailing social and environmental, as well as financial, performance South Africa was one of four founding nations of the ‘Group of Friends of Paragraph 47’, formed to support the sustainability reporting outcomes of Rio+20 Non-legislated code on good corporate governance King III SA and Paragraph 47 2002 2003 2004 2008 2009 2010 2011 2012 Sustainability reporting on a comply-or-explain basis Integrated reporting
18 The Ghana Stock Exchange In June 2013, The Ghana Stock Exchange (GSE) initiated plans to develop a sustainability reporting framework for listed companies. Further to this, the GSE and ACCA will together be running a series of training programmes for CFOs of listed companies on how to adopt sustainability reporting. Ghana is one of the top-performing economies in West Africa, with large listed companies from a diverse range of sectors, including energy, mining, telecommunications, pharmaceuticals and professional services. The GSE sees sustainability reporting as a means of ensuring that Ghana remains a leading economy and competitive on the global stage.
The Nigerian Stock Exchange The Nigerian Stock Exchange (NSE) is Africa’s second largest stock exchange after the JSE. In October 2013, the NSE joined the Sustainable Stock Exchanges Initiative (SSE). Although joining this initiative is a significant step forward, the exchange has yet to introduce any voluntary guidelines or mandatory requirements for the production of sustainability reports by listed companies, although the exchange does provide assistance and training to listed companies on corporate governance issues.
The Stock Exchange of Mauritius The Stock Exchange of Mauritius (SEM) is a hub for investment in Africa and has been one of the exchanges leading the development of capital markets on the continent.
As a means of promoting sustainable business practices, the SEM is working with listed companies to create a sustainability index for the stock exchange, drawing on the Global Reporting Initiative’s reporting framework. Further to this, the SEM has joined with Impact Investment Exchange Asia (IIX) to launch the Impact Exchange trading platform. This is the world’s first publicly traded platform dedicated to connecting social enterprises4 with investors. It operates under SEM’s regulatory framework, with IIX providing oversight of the environmental and social requirements and obligations of companies listing on the platform.
The Zimbabwe Stock Exchange In November 2013, the Zimbabwe Stock Exchange (ZSE) consulted with stakeholders to consider the implementation of sustainability reporting by listed companies in Zimbabwe. It was proposed that the exchange’s listing requirements should be amended to include a requirement to report on ESG practices and performance, with an encouragement to apply the GRI reporting framework. The Zimbabwean government has recognised the benefits of greater corporate transparency as a means of attracting foreign investment, citing the JSE as a good example to follow. The ZSE has not announced when such requirements could come into force, but the fact that the exchange is seriously considering implementing sustainability reporting requirements is a positive step.
4. Social enterprise: an organisation that applies commercial strategies to maximise improvements in human and environmental well-being.
STOCK EXCHANGES IN SUB-SAHARAN AFRICA: CAPTURING INTENT TOWARDS ESG REQUIREMENTS 19 FUTURE SUSTAINABILITY REPORTING ACTIVITIES Beyond the five exchanges noted above, little current action on ESG disclosures was noted among the remaining exchanges reviewed. In order to assess the future potential for stock exchange-led action on sustainability reporting, representatives from stock exchanges, regulators and listed companies were consulted.
Key points from these consultations are shown below. Competitive advantage Owing to the growth of sustainability reporting around the world, exchanges in sub-Saharan Africa should promote sustainability as a means of remaining competitive on the global stage. The fact that many exchanges in the region are relatively new by international standards should not act as a barrier.
A Stock Exchange need not be well established to have sustainability reporting within its listing requirements. This is a global trend and therefore, should enable investors globally to make prudent judgments through such comparisons. In this regard, any opportunity to have sustainability reporting in the listing requirements is highly encouraged’. Tom Kimaru, manager, Compliance, Nairobi Securities Exchange. Exchanges at different stages Some exchanges have progressed further than others. For example, the Kenyan Capital Markets Authority has expressed plans to move to sustainability reporting in the medium term.
As part of an ongoing process to review the corporate governance regime for Kenya, the Authority is working with a stakeholder committee that will be making cross-cutting recommendations on necessary reforms. One of the likely recommendations will be proposals on the timetable and transition process towards the adoption of sustainability reporting in the country‘. Paul Muthaura, acting CEO, Capital Markets Authority Kenya. Capacity building Exchanges have a role to play in training listed companies about sustainability reporting. Owing to the low uptake of the practice in sub-Saharan Africa, companies will need advice and support for reporting on environmental and social issues.
The exchange can act as catalyst in the development of guidelines on sustainability reporting. This could be done if the exchange can be availed with the knowledge on sustainability reporting. The exchange can also act as trainer and promoter of the ideals of sustainability reporting’. John Robson Kamanga, COO, Malawi Stock Exchange. A phased approach A phased approach would help with the transition to sustainability reporting. Stock exchanges could start by producing guidelines for listed companies to report on a voluntary basis. Such guidelines could in time become mandatory. Representatives from the listed companies surveyed expressed a preference for a voluntary approach to sustainability reporting.
Governments and Regulators do have a role in encouraging the development of the reporting process. However, this role should not become that of dictating the nature and scope of such reporting. By avoiding the reporting process becoming a regulatory/government-defined requirement, the reporting format can be better customised to the needs of stakeholders and avoid it becoming a check box exercise’. Victor Yeboah Manu, CFO, Stanbic Bank Ltd Uganda. ‘I am not convinced that regulation-driven reports are any better than others and have personally always believed that sustainability reporting is early in its evolution and that therefore the innovation of the voluntary approach has much going for it.
Ultimately the company, to my mind, benefits more from thinking things through and then reflecting on them in a report than they would by being told what to do’. Karin Ireton, head of sustainability, Standard Bank South Africa.
Collaboration is key A collaborative approach would help foster sustainability reporting. Stock exchanges should work with regulators and other stakeholders to develop reporting guidelines and requirements. By working with international initiatives such as the Sustainable Stock Exchanges Initiative, exchanges in sub-Saharan Africa can benefit from the experience of leading exchanges from around the world. ‘The exchanges/regulators should further foster collaboration with other relevant regulators in order to effectively promote sustainability reporting by listed companies’. Tom Kimaru, manager, Compliance, Nairobi Securities Exchange.
20 The 10 exchanges included in the present study are members of stock exchange associations, as are their regulators. These associations serve a number of purposes, including the promotion of market standards, advocacy work calling for fair, transparent and efficient markets and the provision of a forum for exchanges to share best practice and raise market standards. Some of these associations actively promote the better integration of ESG matters into stock exchange activity. This presents an opportunity for African stock exchanges to be influenced by a ‘trickle down’ from such bodies.
This chapter summarises the sustainability activities of these associations, to gauge the level of opportunity for such ‘trickle down’ impacts.
STOCK EXCHANGE ASSOCIATIONS All of the exchanges reviewed participate in regional associations, with some participating in global associations. Figures 5.1 and 5.2 shows the types of membership the 10 exchanges included in the review have with the global and Africa-wide associations. Figure 5.2 shows the regional exchange associations that are active in sub-Saharan Africa. These include:
the World Federation of Exchanges (WFE): WFE is a trade association of publicly regulated stock, futures and options exchanges
the African Securities Exchange Association (ASEA): ASEA is the primary association of African national exchanges, currently having 23 members across the continent
the Committee of SADC Stock Exchanges (CoSSE): CoSSE is a regional collective and cooperative body of the various stock exchanges in the Southern African Development Community (SADC)
the West African Capital Markets Council (WACMIC): WACMIC is a governance body established to integrate capital markets in the region by developing the West African Common Investment Market
the East African Securities Exchanges Association (EASEA): EASEA is a collective of exchanges in the East African region.
5. The potential role of stock exchange and regulator associations STOCK EXCHANGE REGULATORS Stock exchanges are generally regulated to ensure market confidence, financial stability, consumer protection and to reduce the risk of financial crime. Stock exchange regulators have the ability to enforce reporting requirements that apply to companies listed on an exchange. Like the exchanges, many regulators belong to a global association. Figure 5.3 identifies the membership status of the regulatory bodies of the sub-Saharan exchanges (as well as two of the exchanges themselves). Included is the following:
The International Organisation of Securities Commissions (IOSCO): IOSCO is the primary association of stock exchange regulators around the world, with over 120 securities regulators and 80 other securities market participants.
STOCK EXCHANGES IN SUB-SAHARAN AFRICA: CAPTURING INTENT TOWARDS ESG REQUIREMENTS 21 WFE – World Federation of Exchanges WFE is an association of 60 exchanges from around the world, and offers its members guidance and assistance to develop their management practices (WFE 2014a). Sustainability activity Among its areas of work, WFE promotes standards for generally accepted principles of securities business conduct and has been active in the field of sustainable investment – including work on corporate governance, responsible investment, non-financial disclosure, CSR and ESG issues. The association has also commissioned research on the interrelationship of exchanges and sustainability reporting.
Nonetheless, there is no evidence that WFE enforces specific sustainability criteria or requirements among its members. WFE’s 53rd General Assembly, which took place in October 2013 in Mexico, included a panel discussion on sustainability. In March 2014, WFE launched a sustainability working group with the mandate to build consensus on the purpose, practicality and materiality of ESG data. ASEA – African Securities Exchanges Association ASEA aims to provide a platform for exchange of information, mutual cooperation and technical assistance to enhance the global competiveness of its members.
ASEA currently has 23 members. All exchanges covered by this report are members of ASEA.
Sustainability activity Although ASEA does not provide any direct guidance or evidence of sustainability activity, its vision of ‘enabling African securities exchanges to be key significant drivers of the economic and societal transformation of Africa by the year 2025’ may offer scope for the inclusion of ESG-related issues in the future. Figure 5.1: The 10 exchanges surveyed, in relation to the ASEA and WFE Botswana, BSE Ghana, GSE Kenya, NSE Malawi, MSE Mauritius, SEM Nigeria, NSE Uganda, USE Zambia, LSE Zimbabwe, ZSE South Africa, JSE ‘cooperates and supports’ Member Affiliate Correspondent ‘systematic mutual cooperation and exchange of information’ ASEA African Securities Exchanges Association WFE World Federation of Exchanges No WFE association Member
22 CoSSE – Committee of SADC Stock Exchanges CoSSE aims to encourage cooperation and improve the operational and regulatory underpinnings of its members. There are 11 members of CoSSE, including Botswana, Malawi, South Africa, Zambia and Zimbabwe (SADC 2014). Sustainability activity Although it does not claim any specific sustainability activity, CoSSE lists as a primary objective, promotion of ‘the development of efficient, fair and transparent securities markets within the SADC region’. Such an objective aligns with those of enhancing sustainability reporting or disclosure. WACMIC – West African Capital Markets Integration Council WACMIC brings together representatives of stock exchanges and securities exchange commissions from the West Africa region to harmonise regulation between exchanges and develop a common platform for securities trading (All Africa 2013b).
Sustainability activity Although no specific evidence of sustainability activity has been identified, the nature of WACMIC’s role in integrating regulation and facilitating an exchange of information between members offers potential scope for sustainabilityrelated activity. EASEA – East African Securities Exchanges Association EASEA is a collective of four exchanges in the East Africa region and includes, from this study, Kenya and Uganda (East African 2013). Sustainability activity No specific evidence of sustainability activity identified. Figure 5.2: The 10 exchanges surveyed and their membership of regional exchange associations Botswana, BSE Ghana, GSE Kenya, NSE Malawi, MSE Mauritius, SEM Nigeria, NSE Uganda, USE Zambia, LSE Zimbabwe, ZSE South Africa, JSE CoSSE Committee of SADC Stock Exchanges WACMIC West African Capital Markets Integration Council EASEA East African Securities Exchanges Association Member Member Member